GRAPHIC-Emerging markets eye record year as Q3 keeps rally alive

LONDON, Sept 29 (Reuters) - Having enjoyed a blisteringly
hot summer quarter, emerging markets are heading for one of
their best years on record - as long as the dollar and global
borrowing costs do not rise much further before the end of 2017.

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Emerging equities have returned almost 25 percent
year-to-date to be this year's top-performing asset class. They
are up almost 7 percent this quarter, despite a slight reversal
in the last week caused by an upswing in the dollar and U.S.
yields.

For the first nine months of 2017, Polish and
Chinese equities were leading the pack.

Maarten-Jan Bakkum, emerging markets strategist at NN
Investment Partners, noted that emerging markets had in recent
months easily digested tensions between the United States and
North Korea, signs of a Chinese slowdown and the Fed's hawkish
signals.

"The capital flows to emerging markets have not been
reversed by these three developments. Indeed, interest rates in
the emerging world have continued to fall and emerging equity
markets continue to perform well," Bakkum said.

"The main explanation for this is the improving outlook for
economic growth in most emerging countries."

Emerging currencies have also rallied strongly in 2017 -
JPMorgan's ELMI Plus currency index is up 9 percent this year
and 1.6 percent in the July-September quarter.

The Chilean peso and Brazilian real rose the
most, strengthening around 4 percent in the third quarter
against the greenback: reut.rs/2yIUZTf.

Bonds denominated in emerging currencies are also among the
winners of 2017, gaining 13.7 percent year to date, while
hard-currency sovereign debt is up 8.4 percent: reut.rs/2yIEztQ.

Average local-currency bond yields measured by JP Morgan's
index are now less than a percentage point away from
record lows hit in 2012.

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But the rally has further to go, many reckon, despite a
looming U.S. interest rate rise, because inflation-adjusted
yields in the sector are high enough to compensate for risks.

"Emerging market (local-currency) yields have dropped below
6 percent, but even if the nominal yield has dropped, real
yields are still attractive versus the real yield in developed
markets," said Paul Greer, senior emerging debt trader at
Fidelity International in London.

But there have also been stragglers in the third quarter.

Greek stocks fell around 16 percent on concerns over
the health of the banking sector, while Qatar's index
suffered further losses against a backdrop of tensions between
Doha and other Gulf Arab states.

The Argentine peso and South African rand
slipped by over 5 percent and 3 percent against the dollar
during the third quarter.

The rand has had a choppy year because of political
uncertainty and mixed signals on the economy ahead of the ruling
ANC party's December leadership contest.